The future of investing is personal — and it’s already here

What does it say when the world’s second-largest asset manager and pioneer of index funds makes a move into direct indexing?

Vanguard Group Inc.’s recent acquisition of the direct indexing company Just Invest cannot be viewed in isolation. When taken together with similar moves by other investment giants, it is a profound statement on the future of investing.

In the past year alone, Goldman Sachs Group Inc., Morgan Stanley & Co., BlackRock Inc. and Charles Schwab & Co. have all expanded their direct-indexing capabilities. It is clear they are jockeying to position themselves for the next generation of investors.

It is also clear personalized investing — whether direct indexing, custom indexing and more advanced single stock investment strategies — is an idea whose time has come. The days of offering investors the same old, one-size-fits-all portfolios are ending.

Falling costs and better technology have democratized access to personalized portfolios. Historically, building and managing personalized portfolios of single securities was only available to the select few, such as large institutional investors or high-net-worth individuals. It was simply too time consuming and too expensive to offer such a high degree of personalization to middle- or working-class investors with smaller account balances. But now, advisers can offer hyper-personalized portfolios and sophisticated investment strategies to more investors than ever before.

PORTFOLIOS AND PERSONAL VALUES

Changing expectations and demographics will further accelerate the shift from commoditized to personalized advice. More investors want their portfolios to align with their values and beliefs. They no longer view their portfolio as being separate from their person.

A record $1.7 trillion in assets — roughly the equivalent of New York’s gross domestic product — are now invested in funds focused on environmental, social and governance issues. According to Morgan Stanley, 84% of investors want the ability to tailor their investments to their values.

This demand for personalization is especially strong for the next generations of investors, including millennials, and even Gen Zers like me. A staggering 95% of millennials are interested in sustainable investing. One study found that one-third of millennials often or exclusively use investments that take ESG factors into account. For younger generations, investing in a plain-vanilla mutual fund or cookie-cutter ETF is the equivalent of watching cable television rather than Netflix.

IMPLICATIONS FOR ADVISERS

So what does this latest round of dealmaking actually mean for financial advisers and investors?

If it wasn’t clear before Vanguard’s first-ever acquisition, it should be clearer today that personalization is the future of investment management.

Advisers will need to embrace new technologies that help differentiate them in the short-term and compete effectively in the longer-term. Those that continue to rely solely on mutual funds or ETFs will increasingly struggle to differentiate their services from those who can offer tax-smart, value-aligned and hyper-personalized portfolios.

For investors, there has never been a better time to access and benefit from hyper-personalized portfolios. If they haven’t already, investors should be talking to their financial advisers about whether model portfolios and ETFs remain the best option for them.

They should also be asking whether they could benefit from greater personalization, better technology and better investment strategies.

Samir Vasavada is co-founder and CEO of portfolio management platform Vise.

Related Topics: Direct Indexing, Just Invest, Vanguard Group